RBI’s Failed Section 227 Experience With DHFL

Resolutions under the Insolvency and Bankruptcy Code, 2016 (IBC) were envisaged to be a tool to resolve insolvency of the borrower as a going concern while maximizing the extractable value of its residual assets. Such outcomes would ultimately drive entrepreneurship, enhance the availability of credit, and balance the interests of all stakeholders. It was not intended for these to end up as a sale, auction, or recovery as it has turned out for processes under administration.

In the case of Dewan Housing Finance Corporation Ltd. (DHFL), the Reserve Bank of India (RBI) took control of the company by appointing an administrator and took the company to Insolvency and Bankruptcy Code (IBC) process. This was perhaps a first for a non-banking finance company (NBFC), despite all the drawbacks of the IBC process. The process has been plagued by drawbacks that need to be addressed or alternatives that need to be explored in order to protect the interest of all stakeholders and the economy at large. However, experts say, as evidenced in the case of DHFL, it has been a value destructive proposition for all stakeholders. 

Processes under the Insolvency and Bankruptcy Code (IBC) have neither been swift, as promised nor the level of recoveries, projected at a very low 20 per cent level, have been encouraging. The process, that was meant to revive businesses, ensure the preservation of assets and capital, be fair to all the stakeholders, and was supposed to make doing business in India much easier, has instead ended up being riddled with convoluted outcomes often ending up in protracted litigation. This has been seen repeatedly since its inception, with the Supreme Court having to intervene in nearly every key matter. 

If one were to look at the numbers: up to March 2021, of the 4,376 cases referred for the CIRP (Corporate Insolvency Resolution Process), 2,653 cases have been closed, while the rest are work-in-progress. Of the 2,653 cases closed, only 348 have seen the approval of resolution plans, whereas a whopping 1277 companies ended up liquidated. The remaining cases were either withdrawn by mutual consent or remain under appeal review. While exact figures in relation to job losses (or recovered) are difficult to arrive at, various estimates put the net job loss at nearly 1 million due to the insolvency processes.

In terms of time taken, it has been seen that over 79 per cent of ongoing resolution processes have already exceeded the 270-day timeline mandated in the act, with no clarity yet on the additional time to closure. An indicator of the uncertainty surrounding this, is the fact of a whopping 70 per cent have been undergoing liquidation for over 1 year. And at the end of it all, till 31 March 2021, stakeholders received a mere Rs 600 crore by way of liquidation against total claims of Rs 17,523 crore– which sums up to a mere 3.4 per cent of total claims, that too with delays stretching two to three years. 

As seen in the case of DHFL as well as various other cases, the process ends up being entirely hijacked by secured creditors - especially institutional lenders – with the remaining stakeholders, including unsecured creditors, operational creditors, shareholders, and employees, having almost no say. As the litigation involving Jignesh Shah’s 63 Moons in the DHFL case shows, various stakeholders may create hurdles in the completion of the processes.

Experts say that, as evidenced in DHFL, the process is plagued by multiple drawbacks that need to be addressed either directly or through alternatives that need to be explored in the interest of all stakeholders and the economy at large. These include:

• Perception as a value destructive proposition across various stakeholder categories.

• Low recovery rates – Only Rs 37,500 crore against admitted claims of close to Rs 91,000 crore (about 41 per cent realization) that drops to 24 per cent when the top 9 accounts are removed. 

• Loss of 100 per cent of accrued interest amounting to over Rs 10,000 crore was not factored into resolution at all – including in the overall claims.

• Unsecured Creditors – Only Rs 189 crore against Rs 3778 crore viz. 5 per cent realization on principal and zero recoveries of accrued interest.

NLCT processes have a low likelihood of success in the financial sector due to factors such as lack of hard assets. In addition, the widespread reach of retail presence in most cases can lead to the institution of multiple litigations across the country. 

The government must consider the creation of a mechanism for such companies, especially in the financial services sector as this services sector where the key strengths of the underlying business model can be leveraged to protect stakeholders including retail partners. Alternate dispute resolutions solutions in consultation with all stakeholders are the need of the hour.